Friday, August 15, 2008

Stair Steps to Heaven?

Look at the chart above and you will see a chart of the movement of the S&P 500 stock index over the last 30 days. The untrained eye may not see what I see. Look at the bottoms of each bar, that is a bottom of the trading day. Also look at the tops of the bars and you will see the high in the trading day. Now draw a line connecting all of the tops and another line connecting all the bottoms.
Now look at what has happened over this period of time. Every time the market goes up it falls back, but it doesn't fall back below the previous low. When the market goes up from a sell off it goes higher than the previous high. What this means is that the market has built a floor and it is trying to beak out to the upside.

I believe we are in a strong rally in a bear market. Over the years it has been my experience that many bear market rallies can be stronger that rallies in a bull market. In my most recent posting I suggested that the dollar was in recovery and that traders were have trouble covering their short positions and getting long the dollar. I think the same thing is happening in the American equity markets.

As of Friday August 15 the value of gold was about $780 an ounce much lower than I predicted it would fall. The strength of the dollar which I also predicted has been swift and painful for many traders. In the span of 1 week the British Pound fell to a level it hasn't seen against the dollar in 2 years. Things have moved quicker than I thought they would, but the direction I was predicting was correct.

The American equity markets are making higher high and higher lows, money is stampeding out of gold, energy and all commodities and looking for an opportunity, the alternative is stocks.. The Fed is on hold and the rest of the world will be forced to bring down interest rates in line with interest rates in America. People all of a sudden want to own American stocks and bonds. As long as the chart patten of higher highs and higher lows continue the market will continue to climb. We can have some strong both up and down days, but money is in motion and looking for an opportunity.

Nothing goes up forever so watch out when the trend reverses. When one or the other trend line, lower highs or lower lows is broken this market could fall big time perhaps over 1,000 points in one day. It is possible that we may go back to test the previous highs in the market before the election. The outcome of the election may have significant impact on the direction in the market.

Dan Perkins

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